A asset purchase agreement (APA) is a legal contract in which a buyer acquires specific assets and liabilities of a company, rather than shares in the company itself. Under this acquisition structure, individual business units are selected and transferred, giving the buyer more control over which elements are acquired. This differs fundamentally from an equity transaction where the entire legal entity changes hands.
What exactly is an asset purchase agreement?
An asset purchase agreement is an acquisition contract in which the buyer acquires individual assets and liabilities of a target company without taking over the company's shares. The selling entity continues to exist but is stripped of the transferred business units.
This structure offers buyers strategic advantages in selective acquisitions. Unwanted liabilities, legal risks or non-core assets can be excluded from the transaction. For sellers, it means they retain control over which parts of their business are divested.
The legal complexity of an APA lies in the detailed specification of elements to be transferred. Every asset, contract and obligation must be explicitly named and legally correctly transferred. This requires thorough preparation and legal expertise to structure all aspects correctly.
What is the difference between an asset deal and a share deal?
The fundamental difference lies in what is transferred: in an asset deal, specific business units are bought, in a share deal ownership of the entire company is acquired. This choice has far-reaching implications for tax treatment, liability and transaction structure.
Tax-wise, an asset deal offers buyers a step-up in book value to purchase price, making acquired assets including goodwill depreciable. In share deals, the tax book value remains unchanged, but the seller can benefit from participation exemption. Transfer tax of 10.4% is payable on real estate in asset deals, while share deals can avoid it.
For liability, asset deals provide more protection against historical liabilities, as only specifically transferred debts come with them. Share deals bring with them all existing and future liabilities of the company, which requires extensive due diligence and guarantee arrangements.
What assets are typically transferred in an APA?
Tangible assets include inventory, machinery, real estate, stocks and office equipment. Intangible assets include intellectual property, customer bases, brands, licences, software and goodwill. Contractual rights such as supplier and customer contracts are often included if transferable.
The selection depends on the strategic objectives of the takeover. In a buy-and-build strategy, specific product lines or geographical activities may be chosen. Technology-focused acquisitions focus on intellectual property and development capabilities.
Employee contracts require special attention because employment law transfers may apply. This means automatic transfer of employment contracts with retention of accrued rights, which has an impact on personnel costs and social obligations.
How does due diligence work in an asset purchase agreement?
Due diligence in asset deals focuses on the specific parts to be transferred rather than the entire business. This means detailed examination of property rights, state of assets, contractual obligations and potential liabilities linked to selected assets.
Legal due diligence verifies ownership titles, intellectual property rights and transferability of contracts. Third parties often need to give consent for contract transfer, which can slow down the process. Financial due diligence analyses the profitability and cash flow of the business units to be acquired.
Operational due diligence assesses the state of physical assets, IT systems and processes. In property-intensive transactions, thorough analysis of real estate is essential due to high transfer taxes. Environmental liability and compliance issues require extra attention in industrial assets.
What risks and liabilities apply in an asset deal?
Asset deals inherently offer more protection against unknown liabilities because only explicitly transferred obligations come with them. However, certain legal liabilities such as employment law obligations can automatically transfer regardless of contractual arrangements.
Warranties and indemnities in an APA specifically cover the assets transferred and related risks. Sellers provide warranties on property rights, condition of assets and absence of hidden defects. Buyers often require comprehensive indemnities for tax, environmental and legal risks.
Continuity risks arise because contracts and relationships may not transfer automatically. Customers and suppliers may use the transaction to renegotiate contract terms. Employees may be entitled to severance pay if transfer to the new employer is refused.
What are the key contract terms in an APA?
Pricing in an APA may consist of a fixed purchase price plus adjustment mechanisms for working capital, inventories or debt at closing date. Earn-out arrangements tie part of the price to future performance of the acquired assets.
Closing conditions include regulatory approvals, consent of contracting parties and fulfilment of warranties. In complex transactions, there can be months between signing and closing. Representations & warranties cover the state of assets, legality of transfer and absence of material modifications.
Post-closing obligations regulate systems transfer, staff training and transition support. Non-compete clauses prevent sellers from starting competing activities directly. Escrow arrangements set aside part of the purchase price for any claims under warranties.
Asset purchase agreements require specialist knowledge of legal, tax and operational aspects. The complexity of this transaction structure makes professional guidance essential for optimal results. For strategic support with your acquisition plans, you can contact Contact us for an analysis of your specific situation.
Link copied!
